It was a standoff between the US dollar and S&P 500, and the greenback lost…for now. While the benchmark for safety (dollar) and speculative appetite (equity index) have maintained an unusual positive correlation through recent months, the next move required far more conviction than this stimulus by-product relationship could support. With the Dow Jones FXCM Dollar Index (ticker = USDollar) facing the floor of this year’s bull trend and the S&P 500 standing at the threshold of its own 7-month upside drive, we would need to see a true shift in the fundamental backdrop to take the next big step. As it happens, the combination of a massive, multi-year decline in Japanese markets earlier in the day (to recover from), positive US economic data and reassuring words of stimulus led to the biggest rally for US capital markets in 2013. That is the kind of drive from a risk benchmark that can push EURUSD above 1.3350 and USDJPY below 95.

Yet, despite the push from these pairs and the USDollar’s unattractive technical slip, the fundamental aspects of this resolution are still flimsy. While the market swell Thursday was solidly based (the balance of stocks in the S&P 500 that rose versus fell was the highest since January 2), it hardly changes the fear that growth is moderating and stimulus efforts are leveling off while markets are still richly priced. That means, we are still highly exposed to a ‘risk aversion’ move under deleveraging auspices. If fear does undermine the market’s faith, we will see both benchmarks reverse course for a more durable trend – while maintaining the negative correlation tentatively revived this past session. Igniting sentiment could be difficult ahead of next Wednesday’s FOMC rate decision however. Friday’s data is unlikely to have the punch.

Japanese Yen: USDJPY and EURJPY Unable to Rally with Equities

Thursday seemed another meltdown for the Japanese market with local equities and the yen crosses positing their largest declines in years. Yet, with selling pressure tempering and reversing through the European and US sessions; a solid bounce in risk appetite indirectly helped put out the region’s fire. The recovery, however, doesn’t seem to have inspired much confidence during the active Tokyo trading hours today though. USDJPY has slipped back below 95 and EURJPY is probing 126.50. Market-wide appetite for higher return assets would certainly help drive outside capital into an ‘oversold’ Japanese market, but the moorings to this sentiment shift don’t seem solid enough. Meanwhile, the typically vocal Japanese policy officials have notably turned down the opportunity to talk up stocks and down the yen…

Euro: Officials Remark OMT Legal, But New Stimulus Not Planned

The German Constitutional Court’s hearing on the legality of the Outright Monetary Transaction program from the ECB – the program that many attribute the recent calm in European markets to – is over. A final ruling is not likely for a few months, and the ultimate edict is unlikely to detonate another Euro confidence bomb. That said, we have seen officials clearly lay out the concerns over the effort’s effectiveness and its detrimental side effects (Wedimann has stated concern of unstable markets). Elsewhere, ECB member Mersche restated that the central bank is pondering further LTROs, asset-backed securities purchases and negative interest rates should further support be needed. Stimulus.

Australian Dollar Enjoys Second Biggest Rally in a YearAUDUSD rallied an impressive 1.6 percent Thursday. While that wouldn’t outpace the false reversal on June 3rd, it is the second largest rally for the pair in a year. The performance for this particular ‘major’ was certainly aided by the weakness of the greenback, but the Aussie dollar posted impressive gains against all of its most liquid counterparts – including a 0.3 percent advance against fellow carry currency, the New Zealand dollar. We could try to ascribe some of this performance to data, but the inflation expectation figure and May employment report were essentially in line with expectations. Instead, we witness how a positive risk move can be leveraged by a sense of being ‘oversold’.

British Pound: BoE Official Says Financial System at Risk

“We have intentionally blown the biggest government bond in history.” That was a comment made by BoE executive director for financial stability Andrew Haldane made in testimony Wednesday. Each central bank has its member or members that are concerned about destabilizing capital markets through excessive stimulus, but this remark along with a warning that a disorderly jump in yields was the principle risk to the market are particularly blunt. It is important to assess the balance of the policy group as we await Marc Carney’s arrival as the new Governor of the central bank. Meanwhile, the government sold £2.25 billion in 19-year bonds with a 4.25 percent. The 3.00 percent yield and tepid 1.45 bid-to-cover (demand) show UK debt markets are as tense as those in the US and Japan.

New Zealand Dollar Finding Greater International Demand

According to the Reserve Bank of New Zealand (RBNZ), the percentage of the country’s government bonds held by non residents hit 69.1 percent – the highest level since October 2009. Have you ever wondered why the kiwi dollar is considered one of the ‘majors’ considering it represents such a small economy? It is an investment currency to global investors with both a high credit rating and dependably higher rates of return. That means a strong external demand for the country’s bond speaks to a trend of capital inflow that offers general support for long-term bullish performance. Of course, this is not a day-to-day measure; and the lack of immediate NZDUSD reaction to the news is warranted. For short-term volatility, we need to watch how leading risk trends develop through global equities.

Gold Activity Levels Lowest in Nearly Three Months

The average daily range over the past week for gold is just over $22. As a measure of activity, this is the most tranquil we have seen the commodity since the incredible bear wave crashed on April 12. Of course, a return to normal should pull the market back within reasonable trading levels, but investors are not as sanguine as their recent trading suggests. With the CBOE Gold Volatility Index (an outlook for activity over the coming three months) at 22.7 percent – it has nearly 70 percent higher than the monthly average prior to the abrupt April plunge. Traders remain on edge – as they should. With ETF holdings of gold at a fresh 26-month low (68.09 million ounces) and COT figures expected to update on the 6-year low in futures market’s speculative appetite tomorrow, this is more than a simple dip.

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